GDP and Nonfarm Payrolls look positive, but what do the components tell us?

Since our last post, two of the more widely followed economic data points have been released, Q4 2019 GDP and the January 2020 Nonfarm Payroll Report.  Both had solid headline reports; US GDP grew 2.1% (annualized quarterly change) and nonfarm payrolls increased by 225,000.  Digging below the surface and examining the components of both reports provides insight into the overall health and trend of the US economy.

The quarterly GDP report is calculated by looking at the contribution from consumer spending (PCE), corporate investment (non-residential investment and inventories), government spending, and net trade.  This is often shown as the equation C + I + G + NX, NX being Exports-Imports, or net trade.  As shown in the chart below, Real PCE grew at 1.8% and contributed 1.2% to GDP growth. For comparison, Real PCE grew 3.6% in Q3 and 4.6% in Q2.  Non-residential investment declined by -1.5% and detracted -0.20% from GDP growth.  This was the third consecutive decline.  Inventories detracted -1.1% from GDP growth.  The combined contribution from consumer spending and corporate investment was +0.12%.  According to research from Hedgeye, that is the least amount those groups have contributed to GDP growth since Q1 2011.  Government spending increased by 2.7% and contributed 0.50% to GDP growth.  Net trade contributed 1.5% to GDP growth, benefiting from an -8.70% decline in imports.  As a result, government spending and net trade contributed 2% or 95% of overall GDP growth.  According to Hedgeye, this was the largest net contribution since Q2 2009.

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Source: Bloomburg, Hedgeye Risk Management.

Source: Bloomberg, Hedgeye Risk Management.

Projecting into 2020, the Q4 report would suggest that either the consumer and corporations need to rebound and start adding to GDP growth in a larger way, the US will need to turn into a net exporting economy, or GDP growth is likely going to continue to slow.

Looking at the nonfarm payroll report in more detail, we can see similar signs of slowing in overall economic growth and the consumer sector.  While the headline number was strong, the annual growth rate continued to slow.  The revisions to the payroll reports from April 2018-March 2019 removed around 500,000 jobs, as well as the modest acceleration in y/y growth rate in payrolls.  The average work week has been flat recently and has declined slightly from a year ago.  Fewer hours worked has led to a decline in rate of growth in average weekly earnings (still positive but slowing).  In terms of the impact to GDP, a deceleration in the number of people working (slowing growth rate in payrolls) combined with a reduction in hours worked, will likely lead to a reduction in total output (unless there is a significant increase in productivity).  This would lead to a reduction in the growth rate of GDP (still positive but decelerating). A reduction in the growth rate of wages could also lead to a reduction in the consumption potential of workers.  This could lead to a continued deceleration in the growth rate of PCE, also contributing to a negative rate of change in GDP growth.

Source: Bureau of Labor Statistics, Hedgeye Risk Management.

Source: Bureau of Labor Statistics, Hedgeye Risk Management.

Source: Bureau of Labor Statistics, Hedgeye Risk Management.

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

While recent headline economic releases look strong on the surface, there are some concerns about the ability to reaccelerate in 2020.  Corporate profits and capex are going to need to increase in 2020, which should allow for GDP growth to be less reliant on government spending and volatile trade data. 

 

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